If you’re considering starting a limited liability company (LLC) in California, you‘re probably wondering a lot of things—whether it’s the right decision, what are the costs involved, and how to go about it. We’ve created this guide to answer all these questions to help you kickstart your journey to running your own business on the right note.
Why Starting an LLC in California Is Worth It
Out of all the states, California is definitely one of the least friendly states to start an LLC. It’s a lot more costly and complicated than states like Delaware or Wyoming.
For starters, you need to pay a franchisee tax of over $800 regardless of whether you conduct business in a given year or not. Businesses having more than $250,000 of annual income are subject to additional fees.
Let’s not forget the cost of running a business in California is exceptionally high. From basic elements like utilities and gasoline to securing a line of credit and everything in between, it isn’t exactly easy on the pockets. Just more evidence for why the state ranks 49th for affordability.
The fact that profits are subject to double taxation isn’t great either. This means the state taxes profits before it’s distributed to owners and then taxes again when owners file their individual tax returns.
On the flip side, securing venture capital is arguably the easiest in California, which is a significant advantage to facilitate business growth and survival.
Considering the pros and cons, we’ll only recommend starting an LLC in California if it’s where you’re currently living and where your customer base is as well. Having a business elsewhere may create various inconveniences and have hidden costs.
The Investment Needed to Start an LLC in California
Having a California-based LLC isn’t cheap. There are various upfront costs involved, including:
- LLC online filing fee of $70
- Settlement of information fee of $20
- Annual tax of $800
- Initial report fee of $20
If your annual revenue exceeds $250,000, you have to pay additional fees starting at $900. Plus, you’ll need money to obtain the necessary business permits and licenses based on your industry to lawfully run your business.
Other LLC filing costs include LLC name registration ($10), getting certified document copies ($6 for the first page + $0.50 for each additional page), and a Certificate of Status ($5). Hiring a registered agent will cost you anywhere between $39-$125 depending on your hired company’s goodwill and pricing.
If all this seems intimidating to do yourself, you can always take the easy path and hire a reliable LLC service to take care of all the paperwork. Our top choice, ZenBusiness, offers straightforward LLC setup with quick turnaround and has prices starting at just $0 plus state fees.
You can also choose other LLC service options that have rates starting from anywhere between $79 to $149, plus filing state filing fees. Either way, there are a host of providers that can help you tick all the boxes to getting your California LLC off the ground.
7 steps to start an LLC in California
Let’s get down to business! Below is a step-by-step rundown to help you form and register your California LLC in the easiest possible way.
#1 — See Whether Your Industry Has Filing Regulations
California doesn’t allow just any business to form an LLC in the state because of certain industry regulations. For instance, most licensed professionals cannot be LLCs.
We recommend checking the California Business and Professions Code (B&P) to get the most recent information regarding business licenses and other considerations to factor in before filing with the Secretary of State.
#2 — Name Your Business
Pick a company name that not only complies with California naming requirements but is also unique and easily searchable by potential clients.
As per California LLC naming guidelines:
- Your company name must include the phrase “limited liability company“ or one of its abbreviations (LLC, L.L.C., Limited, Company or Co., or Ltd.), and
- Doesn’t include words that may confuse your LLC with a government agency (FBI, State Department, Treasury) or other restricted words (Bank, Attorney, University)
To get a complete list of naming rules in the state, look up California’s Code of Regulations.
After that, check whether your company’s potential name isn’t already taken by another California LLC. Do a name search on the State of California business name database to know for sure.
We also recommend checking URL availability to ensure your company has an available web domain in case you want to build a corresponding website.
#3 — Choose Your Company’s Registered Agent
California has made it mandatory for LLC owners to appoint a registered agent (also known as the agent for service of process) for their companies.
A registered agent is an individual or person who agrees to accept legal papers, government correspondence, tax forms, and lawsuits on your LLC‘s behalf. Ensure your chosen agent agrees to accept service of process on behalf of your company prior to designation to avoid misunderstandings and miscommunication.
Here’s a quick rundown of your California LLC’s registered agent eligibility criteria:
- Entities or companies must provide registered agent services
- The agent has an address in California
- The agent is available onsite to accept documents during regular business hours
#4 — File Your Articles of Organization
The next step to registering your California LLC is to file Form LLC-1 (Articles of Organization) with the California Secretary of State.
The Articles of Organization document officially establishes your LLC by outlining basic information about your company. Though the document name is intimidating, its preparation and filing process is surprisingly simple. All you need to do is fill out a straightforward online form and submit it either online, by mail, or in person.
Your California Articles of Organization should include the following information:
- Your business name and address
- Contact information
- Your name and information for your agent for service of process
- Whether your LLC will be manager-managed or member-managed
- Signature of the organizer
That fourth point is important to determine at this stage. Your LLC can either be member-managed (company members will be responsible for running the day-to-day business operations) or manager-managed (company members will only be investors and will appoint a manager to run the day-to-day business operations).
After your Articles of Organization are filed and approved, the state will issue a certificate confirming your LLC’s existence. Use this certificate to get your employer identification number (EIN) and business licenses and open a business bank account.
#5 — Create an Operating Agreement
An operating agreement outlines how your LLC plans to conduct business. California requires LLCs to have an operating agreement, but filing it isn’t mandatory—it only needs to be readily accessible.
We also recommend drafting an operating agreement for the purposes of promptly settling disputes that may arise over financials or other issues that can be litigated. Otherwise, you’ll have to take matters to the court, which will make determinations based on state law and not what’s in the best interest of the company and its members.
Your California LLC operating agreement should typically include the following information:
- Your LLC’s name and principal address
- Duration of the LLC
- Registered agent name and address
- Information about the Articles of Organization
- Purpose of the business
- Members and their contribution
- Profits and loss ratio
- Procedure for admitting new members, as well as outgoing members
- LLC day-to-day management
- Indemnification and liability clauses
#6 — File Your LLC’s Statement of Information
Every California LLC—or foreign LLC registered in California—has to file a Statement of Information (Form LLC-12) with the Secretary of State within 90 days after filing their Articles of Organization. After that, the document must be filed every two years.
Note the filing period is the calendar month when you filed the original Articles of Organization and the prior five calendar months.
Again, you can file the statement online or print it out and mail or hand-deliver it to the California Secretary of State, along with the $20 filing fee. Your Statement of Information must include the following information:
- LLC’s name and street address of its principal executive office
- California Secretary of State file number
- Registered agent name and address for service of process
- LLC’s mailing address, if different from the street address of its principal executive office
- Name and complete business or residence addresses of any manager or managers and chief executive officer, if any; if no manager has been elected or appointed, the name and business or residence address of each member
- Valid email address, if the LLC chooses to receive renewal notices and any other notifications from the Secretary of State by electronic mail instead of by United States mail
- LLC’s principal business activity and the general type of business
#7 — Clear Your State Tax Obligations
Last, clear all applicable California taxes to the California Franchise Tax Board (FTB) to continue operating your business lawfully in the state. This includes:
- Annual minimum franchise tax of $800. Submit the tax to the FTB using Form 3522 (Limited Liability Company Tax Voucher)
- Additional taxes if your net income is over $250,000
- Filing procedures, where all LLCs need to file California Form 568 (Limited Liability Company Return of Income) by the 15th day of the fourth month after the close of your company’s taxable year. For more information, go to the California FTB’s website and view the Limited Liability Company tax booklet, including Forms 568 and 3522.
There you have it! That’s how you start an LLC in California in seven steps.
After forming and registering your company, your next actions should focus on getting an Employer Identification Number (EIN) and completing your operating agreement. Remember, you can always consider hiring an LLC service like ZenBusiness to save yourself from some of the hassle.
If this sounds like something you would like, check our list of the best LLC services to get an in-depth review of some of the best options on the market.